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Laquinimod is an oral drug currently being evaluated for the treatment of relapsing, remitting, and primary progressive multiple sclerosis and Huntington’s disease. Laquinimod exerts beneficial activities on both the peripheral immune system and the CNS with distinctive changes in CNS resident cell populations, especially astrocytes and microglia. Analysis of genome-wide expression data revealed activation of the aryl hydrocarbon receptor (AhR) pathway in laquinimod-treated mice. The AhR pathway modulates the differentiation and function of several cell populations, many of which play an important role in neuroinflammation. We therefore tested the consequences of AhR activation in myelin oligodendrocyte glycoprotein (MOG)-induced experimental autoimmune encephalomyelitis (EAE) using AhR knockout mice. We demonstrate that the pronounced effect of laquinimod on clinical score, CNS inflammation, and demyelination in EAE was abolished in AhR−/− mice. Furthermore, using bone marrow chimeras we show that deletion of AhR in the immune system fully abrogates, whereas deletion within the CNS partially abrogates the effect of laquinimod in EAE. These data strongly support the idea that AhR is necessary for the efficacy of laquinimod in EAE and that laquinimod may represent a first-in-class drug targeting AhR for the treatment of multiple sclerosis and other neurodegenerative diseases.