The exact formulation of multi-configuration density-functional theory is discussed in this work. As an alternative to range-separated methods, where electron correlation effects are split in the coordinate space, the combination of configuration interaction methods with orbital occupation functionals is explored at the formal level through the separation of correlation effects in the orbital space. When applied to model Hamiltonians, this approach leads to an exact site-occupation embedding theory (SOET). An adiabatic connection expression is derived for the complementary bath functional and a comparison with density matrix embedding theory is made. Illustrative results are given for the simple two-site Hubbard model. SOET is then applied to a quantum chemical Hamiltonian, thus leading to an exact complete active space site-occupation functional theory (CASSOFT) where active electrons are correlated explicitly within the CAS and the remaining contributions to the correlation energy are described with an orbital occupation functional. The computational implementation of SOET and CASSOFT as well as the development of approximate functionals are left for future work.