The aim of this paper is to provide with an accurate estimate of the VAT gap due to shadow economy in the European Union. Shadow economy circumvents the formal taxation system including the VAT. The estimation is based on an econometric model that uses as macro-economic data as drivers for the size of the VAT gap. The model uses as input data the estimates of the size of the shadow economy as measure by Schneider (2016). The results show that the shadow economy generates around 132 billion euros of gap, accounting for 14% of the total European Union collected VAT amount. Countries from Southern and Eastern Europe have the biggest contributions to the VAT loss due to the shadow economy.