The reaction mechanism for hydroxylation of benzene by N2O has been studied on chemically modified ZSM-5 catalysts. A maximum in catalytic activity and selectivity was reached for steamed samples under mild conditions (about 30% conversion with 94% selectivity). Chemical modifications, through ion exchange (H+ versus Na+), have demonstrated the importance of the presence of Bronsted acid sites. The results obtained suggest a Langmuir-Hinshelwood mechanism between benzene and N2O adsorbed on two distinct active sites. A density functional theory study considering the possible reaction intermediates also confirmed the possible formation of protonated nitrous oxide, leading to a Wheland-type intermediate, thus supporting an electrophilic aromatic substitution assisted by the confined environment provided by the active zeolite framework.