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From 2008 version we can create a cutout in the middle of an xref or block using xclip. Before selecting or creating the polyline we have an option called "inverted clip" which will make the part of the object inside of the polyline disappear instead of the outside.
If you look at the command line, after running the XCLIP command and have selected teh object you want to clip, you will bsee this line:
[Select polyline/Polygonal/Rectangular/Invert clip]
If you type "i" and press enter, you will be inverting the way the XCLIP command works, so instead of keeping the inside of the frame and hiding the outside it will do the opposite. Once you have clipped the XREF you can actually modify its frame later, see this post and video for how to do that.
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