LAN border routers often use PPPoE protocol to communicate with ISPs and to access the Internet through ADSL.

This link provides an example of output of ifconfig about an interface using PPPoE (page 3):

Link encap:Point-to-Point Protocol
inet addr: P-t-P: Mask:
RX packets:10 errors:0 dropped:0 overruns:0 frame:0
TX packets:10 errors:0 dropped:0 overruns:0 carrier:0
collisions:0 txqueuelen:3
RX bytes:125 (125.0 B) TX bytes:113 (113.0 B)

If PPPoE is used to transmit PPP frames inside Ethernet frames, ARP should be allowed like in a normal Ethernet connection. Am I wrong? Looking at the flags, why is ARP here explicitly not used?

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    That output is showing the PPP interface, not the ethernet interface. – hertitu Oct 3 '16 at 18:07

PPP doesn't use MAC addresses or ARP the way ethernet does, so no, there will not be ARP in PPP, but there may be ARP in the ethernet which carries the PPP frames. You will not see anything ethernet-related in the PPP. What you are looking at is the PPP, not the ethernet.

ARP (Address Resolution Protocol) is used by some layer-2 protocols, e.g. ethernet, to resolve a layer-3 address to a layer-2 address. Your layer-3 address is on the PPP, which doesn't use MAC addresses (not all layer-2 protocols do). Since PPP doesn't have layer-2 addresses the way you are thinking, it doesn't use ARP. PPP is Point-to-Point Protocol. There are only two possible hosts on the link, so it has no need of things like MAC addresses, and it doesn't need to resolve a layer-3 address into a layer-2 address.

If the ethernet carrying PPP has no layer-3 address, then there is nothing to resolve, so there will be no ARP.

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